Arbitration in insurance coverage insurance policies is hardly a brand new idea. The truth is, its lineage might be traced to the Commonplace Hearth Coverage of Massachusetts, courting again to 1873—a historic element explored in The First Commonplace Hearth Coverage—Did It Include an Arbitration Clause Quite Than an Appraisal Clause? But, as that article confirms, the “arbitration” of that period extra carefully resembled in the present day’s appraisal course of than what we now think about true arbitration.
Quick-forward to the current, and arbitration clauses are as soon as once more surfacing—this time not as relics of early insurance coverage legislation, however as strategic devices utilized by insurers to bypass state-level restrictions on arbitration. The mechanism empowering this resurgence is the Federal Arbitration Act (FAA), enacted by Congress in 1925 to make sure that contractual agreements to arbitrate disputes could be “legitimate, irrevocable, and enforceable.” (9 U.S.C. § 2).
Nonetheless, whereas the FAA establishes the enforceability of arbitration clauses, it’s silent on process. That procedural vacuum is left to the contract itself—and, in insurance coverage insurance policies, that silence speaks volumes. Most trendy arbitration clauses in insurance coverage contracts establish when and the place arbitration applies and description the composition of the arbitral panel. However past that, they’re strikingly imprecise. They hardly ever establish which guidelines—AAA, JAMS, or in any other case—will govern the method.
In observe, which means the so-called “arbitration” usually devolves into litigation with out a jury, guided by the identical procedural formality and expense that arbitration was presupposed to keep away from. The arbitrators—sometimes attorneys or retired judges—recreate the courtroom surroundings below the guise of informality, counting on the acquainted “guidelines of civil process” and remodeling what needs to be an environment friendly, equitable discussion board right into a drawn-out ordeal.
The result’s an arbitration course of that favors insurers, not insureds. Panels are reluctant to implement rules of excellent religion or to penalize unreasonable declare dealing with. In impact, arbitration turns into litigation stripped of its key safeguard: the jury.
Reclaiming Arbitration for Policyholders
Till policyholder-appointed arbitrators insist that arbitration clauses function as meant—streamlined, centered, and equitable—this imbalance will persist to the advantage of insurance coverage corporations. Correctly understood, these clauses ought to perform as a type of appraisal—a discussion board for resolving disputes over causation, protection, and valuation—not as a license for insurers to relitigate their very own investigation.
An insurer ought to by no means invoke or conform to arbitration earlier than making a protection dedication. By the point an arbitration is requested, the insurer ought to have gathered and reviewed all of the paperwork essential to succeed in its choice. Arbitration mustn’t function the insurer’s first alternative to modify the declare or demand a long time of historic data. Such techniques serve solely to delay decision, drive up prices, and exhaust policyholders.
If an insurer’s protection choice was made swiftly or with out full investigation, that failure lies with them. Arbitrators mustn’t afford insurers a second probability to “redo” their declare dealing with below the pretext of equity.
A Name for Procedural Self-discipline
To revive steadiness, arbitrators and advocates alike should implement self-discipline within the course of. A correct arbitration ought to proceed as follows:
- Assertion of Declare: Clearly define the reason for loss, protection place, and valuation dispute.
- Targeted Discovery: Restrict discovery strictly to those points—trigger, protection, and worth.
- Professional Preparation: Permit both sides to current knowledgeable opinions supporting their place.
- Restricted Depositions: Allow depositions solely upon a displaying of excellent trigger and relevance to slender points.
- Immediate Ultimate Listening to: Conduct the listening to expeditiously, guaranteeing that either side deal with the proof already in hand.
Arbitrators ought to handle the proceedings actively, intervening when events stray past the central dispute. The ultimate choice ought to emerge from an knowledgeable dialogue among the many panel members—party-appointed arbitrators resolving the place they’ll, and the umpire stepping in solely as wanted.
The Precept of the Non-Drafter
In the end, arbitration clauses drafted by insurers have to be interpreted in opposition to them. If no procedural guidelines are specified, the default ought to favor the policyholder—the celebration who didn’t write the contract. Policyholder advocates should refuse to consent to guidelines that mimic civil process or that open the door to the identical drawn-out, pricey course of that arbitration was designed to keep away from.
Till that mindset takes maintain, arbitration in insurance coverage disputes will stay little greater than litigation in disguise, serving the insurer’s pursuits below the pretense of effectivity. The duty, then, falls to policyholder counsel and their chosen arbitrators to reclaim arbitration as a discussion board for equity, not fatigue.
